As we move on into July, we will complete our three-part series on "back-to-basics in the Parts Department with Monthly Parts Inventory Reconciliation. We started first in this "back-to-basics" series with Proper Parts Posting & Receipting, and then in our second, we focused on having the right Pricing Strategies & Practices.
The first two actually lead into our third and final part of the series because both have an impact on how we "balance the books" in the end. We have featured Monthly Parts Reconciliation in the past, but we did not focus on how Parts Reconciliation gets impacted in the first place. The ramifications could be costly and these impacts all start with our first two in this thee-part series.
Even though reconciling the Parts Inventories to the Financial Ledger Balance is extremely important and, in my opinion, should be done each month, many dealers still do not have a basic, Parts Reconciliation Practice in place.
Many may have a "once a year" Parts Inventory Adjustment after they have the Parts Physical Inventory performed, but that's not actually the same thing, or even what we are referring to. A once-a-year adjustment is just that as we just make a journal entry to whatever the final parts inventory count revealed whether positive, or negative.
In my opinion, that's just taking the easy way out and doesn't really explain why we have variances in the first place, especially if that variance is in the wrong direction where the Ledger Balance shows more than the Controlled Balance in the D.M.S.
In theory, shouldn't these balances be the same?...Shouldn't a part be billed out at the cost we paid for it?...and finally, how can we be so far off in either direction?...
Let's find out!
Let's start with defining the Parts Inventory Ledger Balance and the Controlled Inventory Balance in the Dealer Management System, (D.M.S.). Each one has a very specific role in the dealer's second highest asset next to the Used Vehicle Inventory in most dealerships today.
The Ledger Balance Inventory is just basically a dollar amount as it represents what we actually paid for these parts. The Ledger Balance really has no tangible, physical aspect to it as we cannot put our hands on this dollar amount that we paid for our parts inventory, as it's basically just that...a number.
The Controlled Inventory Balance in the D.M.S. is a different inventory because it is tangible, and we can put our hands on it. We can count it, we can add up the total worth of these based on the current price of that inventory, and we can see it. It represents a commodity with a "perceived" worth, or value as this worth is not realized until the part sells.
The "perceived" worth of any commodity, or inventory is only perceived until we actually sell that commodity, or inventory at a cost, whether the cost is what we paid for that part, or not...and that is the whole reason for reconciling the Controlled Inventory Balance to the Accounting in the first place.
"But why wouldn't we bill out a part at the cost we paid for it?"
Although, the "number" on the Accounting Ledger Balance is extremely important because it sets the baseline to our profitability on the parts we sell. We paid a certain amount for a part, we bill that part at a higher amount and the difference is the profit we make on the sale of that part....pretty simple, right?
The are several legitimate reasons that parts are not always billed out at a cost of what we paid for it. This is the whole reason behind the accountability that reconciliation brings out. The "legitimate" cost variances and other "not so legitimate" cost variances have to be reconciled because it's 100% positive or negative profit.
An example of a "legitimate" cost variances are obsolete parts being sold at a lower cost than our purchase price. Also, the Manufacturer Price Updates each month can change the cost of what we paid for parts versus the higher cost of what we sell that part eventually. These cost variances need to be "reconciled" as a positive or negative gross profit each month.
Another "legitimate" cost variance, and perhaps the most common is what I refer to as "Cross Accounting" where parts are received in one inventory account but sold out of another inventory account. The most common of these occurrences happen in the gas, oil & grease and tire inventories.
Tires, for example may be receipted in the main parts inventory by default, but then sold out of the tire inventory account in the Accounting Department. The cost of sale and sale accounts will relieve the Accounting Tire Inventory as a debit, but the inventory credit amount was receipted in the Main Parts Inventory.
This also happens often with the Gas, Oil & Grease Inventory as well as Bulk Oil may be receipted into the Gas, Oil & Grease Inventory, but sold out of the Main Parts Inventory. This often happens with "Packaged Oil" being a part, and "Bulk Oil" considered as Gas, Oil & Grease.
Unfortunately, there are many more "not so legitimate" cost variances that go unnoticed and unaccounted for each day such as parts purchases made at a lower or higher cost, which should be adjusted right up front as "Discounts & Allowances", but often are not adjusted, resulting in reconciliation variances.
There also tends to be a lot of "wheeling & dealing" in the Parts Department, trying to buy parts at a lower cost than stated in the Manufacturers Pricing Guide. If not adjusted for properly, the Controlled Parts Inventory Value goes up higher than the Ledger Balance Inventory, creating an "uplift" in the Controlled Parts Inventory with the positive difference going 100% to profit.
Trying to keep up with price cost changes each month is very hard and will often lead to inventory variances in the Controlled Inventory versus the Accounting Ledge Balance Inventory. This is why we should always make our adjustments, whether positive or negative right up front and sell the parts at the cost listed Manufacturers Pricing Guide each month.
The only exception given on changing the cost of a part is if we are paying more for a part on a Customer Pay Repair Order or Counter Ticket where we pass the additional cost down to the consumer and increase our sale price, again the exception, not the rule.
"So!...what is the proper and correct procedure for Monthly Parts Inventory Reconciliation?"
- Main Parts Inventory Value
- Gas, Oil & Grease Inventory Value
- Tire Inventory Value
- Accessory Inventory, (if separated on the Financial, Page 1)
- Other Parts Inventories, (if any)
- Dirty Core Value on Hand
- Clean Core Inventory Value, (if not part of the Main Parts Inventory Value)
- Parts Work-In-Process on Repair Orders
- Manufacturer's Parts Pricing Update Variance (+/-)
- Outstanding Parts Credits or Returns
- Parts Pre-Billed by the Manufacturer, but Not Received
If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at :
(786) 521 - 1720...After all, not knowing is not worth not "fixing" it...